A new oral communications recordkeeping requirement was one of the key topics discussed at the 2013 NIBA Conference in Chicago on September 18, 2013. Covered registrants must comply by December 21, 2013, unless they obtain an extension. A recap of the Legal Panel discussion on the new recording requirements follows for the benefit of those not in attendance.
Covered Oral Communications
The Commodity Futures Trading Commission amended Regulation 1.35(a) to require futures commission merchants (FCMs), large introducing brokers (IBs), retail foreign exchange dealers (RFEDs), and certain other registrants to record oral communications that lead to the execution of a transaction in a commodity interest. Covered communications include, but are not limited to, quotes, solicitations, bids, offers, instructions, trading and prices, whether communicated by telephone, voicemail, fax, instant messaging, chat rooms, email, mobile device or other digital or electronic media. The Commission does not intend for the final rule to require the recording of face-to-face conversations that do not occur over electronic, digital or other media. However, covered communications that occur over personal (as opposed to firm-provided) phones and devices must also be recorded and maintained.
While records of written communications must still be kept for five years (as was previously the case), records of covered oral communications need only be kept for one year. All records that lead to the execution of a transaction in a commodity interest must be kept in a form and manner identifiable and searchable by transaction.
Small IB Exemption
The NIBA, among others, submitted comments to the amended rule, as originally proposed, asserting thatthe cost of implementing and maintaining an oral communication recording system would be overly burdensome for small entities. In response, the Commission created an exemption for small IBs in the final rule. Small IBs, defined as IBs with less than $5 million in total aggregate gross revenues over the preceding three years, are excluded from the new requirement to record oral communications. However, there is no small IB exemption to the written communications recordkeeping requirement. Consequently, a small IB will still need to maintain a written record of a customer’s order received over the telephone even if the small IB does not have to record the telephone call.
Record Storage and Retention
To comply with the amended rule, covered registrants will need to develop, purchase or lease recording technology. From discussions with recording software vendors, we understand that the more proprietary the software, the more expensive it tends to be. In addition to acquisition and set-up costs, covered registrants should also be prepared to incur monthly recording fees, data storage and back-up fees, as well as costs relating to search and retrieval functionality. While recordings do not have to be kept in separate files, the records must be kept in a form and manner identifiable and searchable by transaction.
Many factors can influence the costs associated with compliance. For example, newer IP phone systems tend to be easily set up for recording with little or no overhead. Older digital PBX systems, on the other hand, may require costly recording hardware and involve more lead time. Internal non-cloud-based recording solutions typically cost more, but the costs may be mitigated if an entity already has recording capabilities. Cloud-based solutions may cost less to implement, but may vary significantly from vendor to vendor. Voice recognition software can be extremely helpful in automatically identifying and retrieving relevant recordings, but can materially increase compliance costs. The use of mobile telephones may also materially increase compliance costs. Depending on business needs and the cost of available technology, an entity may want to consider prohibiting the use of mobile telephones in connection with commodity interest transactions.
Relying on Others for Compliance
While compliance with Regulation 1.35(a) remains the responsibility of each covered registrant, entities may reasonably rely on an FCM, designated contract market, swap execution facility or other registrant to maintain certain records on their behalf. The other party’s records must be readily accessible, duplicate the information required to be kept under Regulation 1.35(a) and be maintained in accordance with Commission rules.
For example, an IB may not need to separately record phone calls with an FCM where the FCM already records its phone calls with the IB, and the IB and FCM agree that the FCM will maintain the phone records and provide access to the IB. The IB would still be required to record a phone call with a customer if it first receives the customer order by phone and then calls it into the FCM.
Importantly, reliance on another party does not eliminate a covered registrant’s responsibility to comply. If the other party’s records do not meet Commission requirements, then the covered registrant may still be held liable for failure to comply. The Commission has also cautioned against reliance on a third party for certain records, such as instant messages and emails, where it is unlikely that the third party recipient will have a complete record of the covered communications.
Compliance with Federal and State Wiretapping and Privacy Laws
In complying with the new requirement, covered registrants should be cautious not to run afoul of federal and state wiretapping and privacy laws. Under federal law, a person may generally record a telephone call if the person recording the call is a party to the call or if one of the parties to the call has given prior consent to being recorded. By contrast, state recording laws may vary significantly from state to state.
Illinois has one of the broadest eavesdropping protections of its kind. The current form of the Illinois Eavesdropping Act (the constitutionality of which has been challenged) makes it a felony to record all or any part of any conversation unless all parties to the conversation give their consent. In addition to criminal prosecution, violating the Illinois law can expose an entity to a civil lawsuit for damages by a party who was recorded without their consent.
In Illinois, consent can generally be implied or inferred based on the surrounding circumstances indicating that a party knowingly agreed to be recorded. For example, entities may adequately warn all callers at the outset of the conversation that the call is being recorded, and if the caller does not object, then the caller may be considered to have impliedly consented to having the conversation recorded. Such a procedure may not, however, offer protection where a new party joins a call in progress and the warning is not repeated. Covered entities may better protect themselves by obtaining express written consent from their customers and counterparties as a part of, or in addition to, their written agreements. Additionally, entities should update their employment policies to ensure consent from their employees to the recording of their communications during the course of their employment.
Requests for Extensions of Time to Comply
In response to criticisms regarding the difficulties of immediate compliance, the final rule offers relief in the form of an alternative compliance schedule. This relief is available for covered registrants who find compliance to be technologically or economically impracticable. An entity who seeks, in good faith, to comply with the oral communications recording requirement may submit a written request to the Commission to comply within an alternative technologically practicable schedule. The request must specify the basis in fact supporting the claim that compliance would be impracticable, the specific costs and technical obstacles, and the efforts that will be made to ensure compliance according to an alternative schedule within a reasonable time period beyond the December 21st deadline. The Commission will grant such requests at its discretion, but an alternative compliance schedule will be deemed approved if the Commission does not act upon the request within 30 days of its receipt of the request.
Summary of Recommendations
Covered registrants should revisit their customer agreements, brokerage agreements, compliance manuals, internal employee policies and procedures manuals to ensure compliance with the new oral communications recording and recordkeeping requirements.
If a covered registrant intends to rely on another registrant for compliance, then it should document each party’s respective obligations, including the other party’s obligation to record and keep the records in accordance with Commission rules and to provide the covered registrant with immediate access to such records.
Entities may want to consider implementing policies and procedures that forbid covered communications on personal phones and other communication devices lacking the requisite recording capability. Although the Commission has rejected industry requests for a safe harbor for entities that adopt a policy prohibiting the use of personal phones to solicit or accept orders, the Commission has said that it will consider good faith compliance with policies reasonably designed to comply with the new rule as a mitigating factor when exercising its discretion in enforcement actions for violations of the rule.
Covered registrants should revise their documents to include language providing notice to, and obtain consents from not only customers and counterparties, but also employees, that communications will be recorded. To alleviate employee privacy concerns, entities may also want to institute a policy that employees are not to conduct personal business on recorded lines.
About the Author
Jeffrey E. Kopiwoda is a Partner at Funkhouser Vegosen Liebman & Dunn Ltd. (FVLD). A fifteen-year veteran of the futures industry, Jeff advises FCMs, IBs, pool operators, trading advisors and other futures industry participants on both regulatory and general legal matters. Jeff was a member of the Legal Update Panel for the 2013 Chicago NIBA Conference, and may be reached directly at +1.312.701.6820 |JKopiwoda@fvldlaw.com
This publication is merely informational and does not constitute legal advice.